Legal Marketing Trend: Litigation Portfolio Funding
Portfolio litigation financing is growing and can help your firm to find new clients, develop existing business, and free up capital for your law firm’s operations.
In June, Gretchen Koehler, Chief Marketing Officer at Bentham IMF, did an interview with JD Supra, where she discussed how legal marketers could use litigation portfolio funding to seek out new clients and develop their books of business.
But what does litigation funding have to do with legal marketing?
Traditionally known as a means to finance one-off, high-potential contingency plaintiffs (a la Bollea v. Gawker), law firms are increasingly seeking investors to fund their litigation portfolios. And what has been traditionally viewed by lawyers as suspicious (or downright unethical), doesn’t appear to be slowing down: Burford Capital, the world’s largest litigation funding company, committed $205 million to portfolio financing deals in the first half of 2018 alone—up 70 percent from last year.
Here’s how it works: a litigation funding company analyzes a firm’s portfolio of at least three cases and decides whether to invest based on the potential strength of the claims and the potential damages on one or more should the law firm successfully settle or win. That return is “cross-collateralized” by all of the cases in the portfolio, and the financier receives a return from whichever cases win or settle, getting a capped multiple of its invested capital (typically at least 10x, according to Koehler). Portfolios are less risky than single cases for investors, so the return terms for firms are more favorable than in binary claims.
Portfolio financing creates flexibility for your law firm, and for your clients who shift their cost-risk to a third party. Because the U.S. market is still relatively new to this type of funding, that can be a powerful differentiator and marketing tool. With litigation funding you can:
Add contingency clients, or find new opportunities within existing clients.
Sharing risk with clients through contingency fees is one way to increase your profitability—but adding contingent fee cases can be difficult when your firm is accustomed to billing by the hour. This is especially true for commercial defense firms who are otherwise unable to take on the risk of high-stakes plaintiffs’ claims. Portfolio financing is non-recourse providing firms with the ability to take on and reduce this risk and allowing clients to enjoy the benefits of contingency fee arrangements.
This offers opportunities in your existing book of business, too: as you educate clients about the availability of litigation funding, you may be able to help them realize other claims that they initially didn’t consider.
Offer alternative fee and flexible payment arrangements.
Diversification of a portfolio is essential. One with only personal injury cases, for example, might be considered high-risk. But a good portfolio can mitigate the risk of loss for the finance company, and infuse your firm with capital to reduce hourly billing and offer alternative fee arrangements to your non-contingent clients.
This ensures your firm gets paid (alleviating receivables stress for you) and provides your clients with a predictable budget for their cases.
Fund cases which alone, wouldn’t be backed by a litigation financier.
Every litigation funder wants the guaranteed big win. But what about when the case is 50/50, or the damages ratio is low? Financing a portfolio allows you to continue working on cases that still offer some potential for recovery, and bundle them with other matters that provide the same return.
Get a better deal for your clients, and a higher payout for your firm.
Litigation finance gives you the advantage of having more time to litigate, which provides your clients, in turn, a longer runway before settling. And because the costs are covered, you can negotiate better settlements for your clients, who don’t have to settle on the first lowball offer that comes in.
Take litigation expenses off the budget sheets of corporate clients.
For corporate clients and in-house legal departments, litigation expenses can be a headache, as they need to be deducted from the company’s balance sheet. As expenses add it up, it can mean thousands (if not millions) in ‘lost capital’ from those balance sheets.
By financing your litigation portfolio, not only is there the potential of substantially reduced pricing, but the corporation can also take the risk off balance sheet, which has a significant impact on valuation. For in-house departments, financing their portfolio of litigation can lead to a balance sheet that helps keep capital inside the company.
Use the capital for more marketing, or fund your firm’s operating expenses.
A third-party footing the bill for expenses and fees frees up working capital for your firm—which you can use for operational costs, investing in new laterals, or adding additional contingency cases to your book of business. And because the funding is non-recourse, unlike a loan or line of credit, you shift the risk of the expenses to the company who’s funding your cases.
And if you’re an exceptionally talented litigator? Portfolio financing may be a means to hang your shingle, without requiring you to invest your own capital or obtain a traditional loan. Such was the case with Ray Boucher who, after winning a $660-million court settlement for California clergy-abuse victims, used Bentham’s portfolio financing to launch his nine-person litigation firm.
Early adopters of portfolio financing will likely be rewarded. Developing a relationship with a litigation funding company now can mean returns for you and clients-—and it helps to do so sooner before the market is saturated. Either way, it’s a creative tool to create new business for your book and a low-risk way to offer more services to current clients.